While it is true that you cannot completely eliminate risk when investing, it is equally true that you can reduce it by diversifying your investments.

The saying "Don't put all your eggs in one basket" is a principle that applies to investing as well and means that you should spread your investments across different "baskets". If one of the baskets falls, not all your eggs will be broken: your losses are likely to be manageable.

Diversification hence means that you choose investments that are likely to react differently in different markets. The idea behind diversifying your investments is that in general not all investments/asset classes move in the same direction. If the equity market falls, you could for example still get a reasonable return from the portion of your investments in debt.

Broadly, there are two types of asset classes: equity (shares) and fixed income/debt (bonds), however commodities (like gold) can also be considered an 'asset class'.

Equity has higher potential gains but carries more risk, while fixed income is considered to be less risky and has a likely ability to provide steady returns.

KEY POINT

You can reduce the risk with investments by diversifying your investments across asset classes.